Gartner EXP Says Internal IS Departments Should Examine Implementing A Chargeback Strategy to Manage IT Costs
EGHAM, UNITED KINGDOM, July 15, 2003 — The busting of the tech bubble and the global economic slowdown have driven sound financial management to the top of the business agenda. As companies try to better manage expenses, they should examine implementing a chargeback system for their internal IT services support, according to Gartner Executive Programs (EXP), a unit of Gartner, Inc. (NYSE: IT and ITB).
"Business units must be cost-effective in their use of IT," said Marcus Blosch, vice president and research director for Gartner EXP. "IS organizations must be seen to deliver value for money. Bringing these together is a challenge. That's where chargeback comes in."
Chargeback for IT services is used to modify behavior in the use of IT services by recovering costs. It reveals to users the cost of the IT services they consume. However, it can also lead to arguments over how chargebacks are calculated, political tensions and into the debate that IT services can be bought cheaper elsewhere.
"Chargeback is an IT governance mechanism," said Blosch. "It's just one of the tools an enterprise can use to get the behaviors it desires in the use of IT services. To be effective, chargeback has to be seen in the context of IT governance."
To implement a chargeback system, it needs to be broken out into three steps. The first step is identifying IT service costs, followed by cost allocation, and the third step is cost recovery.
When identifying IT service costs, Gartner EXP analysts said a company must create a standardized chart of accounts showing what IT services exist, who uses them and what the cost drivers are. Cost identification is mandatory and fundamental to IS being able to make informed decisions.
"A standardized chart of accounts can aggregate the cost elements of a service, allowing cost comparisons across business units and external benchmarking," Blosch said. "Keep the level of detail in the chart of accounts simple enough to reduce classification errors, yet granular enough to identify which costs occur and where."
The second step, cost allocation, provides a greater level of detail of individual business unit IT service costs. Allocating costs for IT services that are directly attributable to a business unit is relatively straightforward, but it's not so easy for shared services.
For many enterprises, cost allocation is enough. It's an estimated calculation on how individual business units are using IT services, and can be used as a basis for decision making. However, in some cases this notional figure doesn't strongly influence behavior, so cost recovery is needed.
Cost recovery, the third step of chargeback, actually moves money between budgets. And that's bound to get the attention of business unit managers who are focused on their bottom line.
"To move to cost recovery you're going to have to set up a chargeback committee, with business unit representation and chaired by the CFO," Blosch said. "This committee sets up and runs the chargeback. The CIO sits on the committee, but in an advisory role."
Additional information is available in the Gartner EXP Report "Chargeback - How Far Should You Go?" This report explains why chargeback has become such an important tool and provides practical how-to advice on successfully implementing it.
About Gartner EXP
Gartner Executive Programs (EXP) is a member-based organization of more than 1,700 CIOs worldwide. Members benefit from the convenience of a single source of knowledge, one-to-one counsel, personalized service, the shared knowledge of the world's largest community of CIOs, and the assurance of Gartner objectivity and insight. Additional information about Gartner EXP can be found on the Gartner Web site at www.gartner.com/exp.
About Gartner:
Gartner, Inc. is the leading provider of
research and analysis on the global information technology industry. Gartner serves more
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